Public Information Notice: IMF Concludes 2002 Article IV Consultation with Lebanon
IMF News, March 20, 2003
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- Published: March 20, 2003
Background and recent macroeconomic developments
- Post-civil war reconstruction and rehabilitation led to an exceptional accumulation of government debt.
- Macroeconomic conditions worsened in spring 2002 when the international reserve position reached its lowest level, but have since "considerably improved."
- Market confidence was bolstered by the Paris II meeting in November 2002 (under the auspices of the French Government).
- Real GDP growth in 2002: "about 2 percent."
- Inflation in 2002: "1.75 percent."
- Lebanon's real effective exchange rate appreciated over the past several years due to U.S. dollar strength; some appreciation reversed over the past year with U.S. dollar weakening and low domestic inflation.
- Fiscal consolidation:
- Overall fiscal deficit reduced from "19.4 percent of GDP in 2001" to "15.7 percent in 2002."
- Primary fiscal balance moved from a deficit of "7.6 percent of GDP in 2000" to a surplus of "2.1 percent of GDP in 2002."
- Main 2002 revenue source: the "10 percent VAT introduced with IMF technical assistance in February 2002."
- Balance of payments and monetary developments:
- Balance of payments turned into a surplus in 2002; central bank began replenishing reserves.
- Factors supporting improvement: renewed regional interest (portfolio and real estate), tourism, successful VAT introduction, removal from FATF list of noncooperating countries, progress in privatization preparations (telecommunications, power, water).
- Paris II commitments: total "US$4.3 billion," of which "US$3.1 billion was for budgetary support" to be fully disbursed by end-2003; remainder project-related loans.
- Broad money (M3) increased by "3.2 percent in December alone," bringing 12-month growth to "7.6 percent" (compared with "3.6 percent" in the year through July).
- Share of dollar deposits in M3 declined to "64.2 percent in December," from "69.8 percent in May 2002."
- Interest rates: two-year T-bill fell from "16.1 percent" (including a 2 percent premium) to "9.2 percent" by late December; three-month bill from "11.2 percent" to "7.0 percent" (last auction on January 9).
- Government not issuing treasury bills given comfortable liquidity position.
- Central bank reserves and inflows:
- Gross international reserves (excluding gold) increased to "US$5.1 billion by end-December" (from "US$3.1 billion in June").
- Preliminary data: BdL accumulated another "US$1.1 billion in gross reserves in January."
- Sterilization and interest rates:
- Large certificates of deposit issued by BdL to sterilize inflows; 60-day CD rates declined from "9.3 percent" immediately after Paris II to "5.9 percent" in late January.
- Deposit rates declined by about "100" (Lebanese pound) and "200 basis points" (dollar); lending rates declining more slowly.
- Spreads on Lebanese Government Eurobonds narrowed from "987 basis points" before Paris II to "611 basis points at end-January"; EMBI Global compressed by about "41 basis points" in same period.
- Banking sector:
- Bank profitability improved somewhat in 2002.
- Foreign exchange cover for bank deposits improved.
- Nonperforming loans rose to "about 27 percent of total loans at end-2002."
- Total provisioning against problem loans remained close to "70 percent."
- Authorities' 2003–medium-term strategy:
- Objectives: reduce government debt and servicing cost, restore growth via fiscal adjustment, large-scale privatization, burden sharing with banking system, and concessional external assistance.
- 2003 budget consistent with a primary surplus of "4.6 percent of GDP," targeting a steady increase to "9 percent of GDP by 2007."
- Authorities expect privatization and securitization proceeds in 2003-07 to total "US$8.9 billion."
- Paris II disbursements: "US$390 million" disbursed in December 2002; "US$600 million" in January 2003; "US$1,250 million" in February and early March; remainder to be disbursed in second quarter ("US$692 million") and later in the year.
- Debt and bank arrangements:
- Agreement with commercial banks (holding about "60 percent of the government debt") to reduce interest payments over next two years:
- Banks to purchase zero-interest, two-year government securities equal to "10 percent of their deposit base as of October 31, 2002 (US$3.8 billion, after some exemptions)."
- Subscriptions in five equal installments during January-May.
- In December 2002, central bank cancelled "US$1.8 billion" of treasury bills against a reduction in the revaluation account for gold and foreign exchange.
- Central bank exchanged remaining government debt holdings amounting to an additional "US$1.8 billion" for a 15-year Eurobond carrying a "4 percent coupon."
Executive Board Assessment — findings and judgments
- Directors welcomed steps taken over the past two years to address macroeconomic imbalances and public debt accumulated after the 15-year civil war.
- Commendations:
- Authorities' strategy grounded in strong country ownership, focusing on debt reduction and lowering debt servicing cost to enhance confidence and enable private sector-led growth.
- Impressive efforts produced a major turnaround in the primary fiscal balance and improved economic and balance of payments performance, with signs of renewed investor interest.
- Cautions and residual risks:
- The path to strengthening economic viability remains "long and arduous," requiring sustained efforts, continued strong ownership, and international support.
- Debt stock will remain high for many years; prospects for debt sustainability are highly sensitive to adverse shocks and macroeconomic developments (including growth).
- Minimizing risks requires continued strong efforts to improve debt dynamics and wide-ranging structural reforms for sustainable higher growth.
- Fiscal policy guidance:
- Continued strong fiscal stance essential in 2003 and over the medium term.
- Directors welcomed primary surplus improvement in the 2003 budget.
- Revenue measures praised: successful VAT introduction, adoption of new tax on interest income, planned large taxpayer unit.
- Directors urged authorities to specify additional measures early and, if necessary, bring them forward to ensure future fiscal adjustments while considering growth impacts.
- Expenditure-side measures recommended: rationalize public employment, wage and pension bill, and reallocate resources to strengthen social safety net.
- Revenue-side recommendations: introduce a comprehensive income tax; consider increasing the VAT rate "at the appropriate time."
- Highlighted importance of ensuring financial viability of the National Social Security Fund (surplus declined in last two years).
- Privatization and structural reform:
- Early and substantial progress in privatization is key to credibility of debt reduction strategy.
- Progress welcomed (enabling legislation, managerial improvements, restructuring in EdL); auctioning of cellular network licenses somewhat delayed; privatizations in other sectors may take longer than expected.
- Authorities urged to intensify efforts and ensure transparency to sustain investor confidence and public support.
- Caution about planned securitization of government revenues: could reduce budgetary revenue over medium term and possibly raise borrowing costs; authorities encouraged to keep policy under review.
- Monetary and financial sector guidance:
- Substantial reduction in interest rates welcomed.
- Absorption of large external inflows poses challenges; retirement of local currency debt may require continued large-scale sterilization by Banque du Liban (BdL).
- Prudential supervision steps welcomed; Directors urged continued vigilance due to rising nonperforming loans and exposures to government debt and exchange rate risk.
- Commended progress on anti-money laundering and combating financing of terrorism.
- Indication that impact of debt-relief measures on income positions of BdL and commercial banks appears manageable, but Directors stressed need for continued monitoring, particularly on overall banking system health.
- Encouraged further efforts to extend debt maturities, smooth debt service, and reduce the foreign currency component of debt.
- Growth strategy and external integration:
- Importance of a coherent medium-term strategy to strengthen and diversify the growth base stressed.
- Progress in further liberalizing trade regime welcomed; instrumental in reaching association agreement with the EU and should facilitate WTO accession.
- Data and transparency:
- Directors welcomed Lebanon's decision to participate in the General Data Dissemination System and encouraged closing remaining data gaps for economic analysis and policymaking.
- Institutional engagement:
- Directors welcomed Paris II and leadership of the President of France; progress in mobilizing committed resources noted.
- Directors welcomed request to Fund staff by Paris II participants to prepare six-monthly status reports to track developments closely.
Key quantitative indicators (selected)
- Real GDP change:
- 1996: "4.0"
- 1997: "3.0"
- 1998: "1.0"
- 1999: "-0.5"
- 2000: "2.0"
- 2001: (not shown)
- 2002: "about 2 percent" (text)
- Consumer prices (period average, Beirut and suburbs):
- 1996: "8.9"
- 1997: "7.7"
- 1998: "4.5"
- 1999: "0.2"
- 2000: "-0.4"
- 2001: "1.8"
- 2002: "1.75 percent" (text)
- External economy (in billions of U.S. dollars; unless otherwise indicated):
- Exports, f.o.b.: 1996 "0.8"; 1997 "0.6"; 1998 "0.7"; 1999 "0.9"
- Imports, f.o.b.: 1996 "-7.0"; 1997 "-6.9"; 1998 "-5.8"; 1999 "-6.8"; 2000 "-6.0"
- Current account balance (in billions): 1996 "-4.8"; 1997 "-4.4"; 1998 "-3.3"; 1999 "-3.1"; 2000 "-3.4"; 2001 "-2.6"
- Current account balance (In percent of GDP): 1996 "-37.1"; 1997 "-29.4"; 1998 "-27.1"; 1999 "-20.0"; 2000 "-18.7"; 2001 "-20.7"; 2002 "-15.3"
- Capital account balance (in billions): 1996 "5.6"; 1997 "4.8"; 1998 "3.9"; 1999 "1.2"; 2000 "3.8"
- Overall balance (in billions): 1996 "0.4"; 1997 "0.3"; 1998 "-0.3"; 1999 "-1.2"; 2000 "1.6"
- Gross official reserves (excluding gold, in billions): 1996 "9.3"; 1997 "8.6"; 1998 "9.2"; 1999 "5.9"; 2000 "4.4"; 2001 "5.1"; 2002 "US$5.1 billion by end-December" (text; also "US$3.1 billion in June")
- Change in real effective exchange rate (in percent): 1996 "12.1"; 1997 "18.1"; 1998 "8.1"; 1999 "6.1"; 2000 "2.1"; 2001 "-2.3"
- Financial variables (in percent of GDP unless otherwise indicated):
- Central government fiscal balance (overall, after grants, checks issued basis): 1996 "-21.7"; 1997 "-27.0"; 1998 "-18.1"; 1999 "-16.2"; 2000 "-24.6"; 2001 "-19.4"; 2002 "-15.7"
- Gross government debt: 1996 "101.2"; 1997 "102.7"; 1998 "113.6"; 1999 "135.2"; 2000 "152.3"; 2001 "169.7"; 2002 "177.7"
- Of which in foreign currency: 1996 "14.5"; 1997 "16.2"; 1998 "25.6"; 1999 "35.3"; 2000 "45.9"; 2001 "61.3"; 2002 "80.6"
- Change in broad money (end of period, percent): 1996 "27.8"; 1997 "19.3"; 1998 "16.1"; 1999 "11.1"; 2000 "9.6"; 2001 "7.4"; 2002 "7.6"
- Yield on 24-month Lebanese pound treasury bills (primary market rate, percent, end of period): 1996 "20.5"; 1997 "16.7"; 1998 "14.1"
Public Information Notice: IMF Concludes 2002 Article IV Consultation with Lebanon — March 20, 2003.